Barry Mills: Deal of the Century

Barry Mills explains a recent financial transaction by the College that should serve Bowdoin well for many years to come.

Bowdoin recently completed a financial transaction that will have a significant impact on the College for the next 100 years: the sale of $128.5 million taxable bonds that become due on July 1, 2112, at an interest rate of 4.69% and that require no payment of principal over the term of the bonds.

In doing so, Bowdoin is the only small college in America to issue a so-called “century bond.” More importantly, this move provides unique and potentially quite remarkable opportunities for the College to prosper, to grow our endowment, and to protect Bowdoin from the negative effects of inflation.

The story below will be understood well by those in the world of finance. For those of you who find this subject matter a bit arcane, I hope you will read on nonetheless. This transaction is very important to the College and I want to make sure we describe it accurately. Personally, I enjoyed this work a great deal, as it brought me back to the world where I lived professionally before I came to Bowdoin.

…this move provides unique and potentially quite remarkable opportunities for the College to prosper, to grow our endowment, and to protect Bowdoin from the negative effects of inflation.

The history of this transaction goes back to the financing Bowdoin secured over the past 20 years for a variety of capital projects. The College currently has outstanding tax-exempt debt of about $98 million that is due in 2039, at an interest rate of approximately 5.1%. The unique nature of tax-exempt debt is that it must be paid in full at maturity, so in our case, there is no opportunity to refinance this debt beyond 2039 on a tax-exempt basis. Therefore, the College was faced with the reality that, at some point before 2039, we would have to refinance that debt on a taxable basis or take $98 million from the endowment or other sources to repay the debt.

We have been focused on a repayment plan for this $98 million since we refinanced it in 2008 (to provide for the “bullet” maturity in 2039), and we had strategies in place to allow the College to pay the debt off in 2039. But with current long-term taxable rates at historic lows, we recently began to focus on refinancing the debt now. One can never predict interest rates, but the opportunity to act seemed compelling.

The proceeds of the “century bond” will be used in part to repay the $98 million of tax-exempt debt in 2019, which is the first time the tax-exempt debt may be paid off in full. We have created an escrow of $98 million from the proceeds of the “century bond” and will invest this money on a very conservative basis over the next few years so that it will be there to repay the tax-exempt debt in 2019. (For those of you in the financing business, we did not legally defease the debt, but have created an economic defeasance.) Hopefully, with conservative investments, we can earn somewhere in the neighborhood of the interest rate we are paying on the money. Even if we don’t earn that rate, the differential in cost still made the transaction attractive to the College, as I will explain below.

The unique nature of our transaction is that the bonds are due in 100 years and, with one exception, the interest rate is the lowest rate for “century bonds” that have been issued by any institution of higher education (the University of Pennsylvania did a “century bond” at 4.674%—they beat us by 0.016%). In consultation with our Board of Trustees and the Investment Committee, the College concluded that, given the low interest rate and the likelihood of inflation over the next 100 years, this transaction provides an excellent and unique opportunity for the College to prosper and to grow our endowment.

Although, technically, the transaction is debt on our balance sheet, we view it more like permanent capital for the College. It is as if we sold preferred stock in Bowdoin where the coupon is 4.69%. If one concludes that, over the long term, we can earn in excess of 4.69% on our endowment while taking into account the likely inflation over the period, this transaction should be very good for the College over the long term. It is simply a superb hedge against future inflation.

Although, technically, the transaction is debt on our balance sheet, we view it more like permanent capital for the College.

As I have mentioned, Bowdoin is the only small college to have completed a “century bond.” Yale issued a “century bond” several years ago, and more recently in this cycle, bonds have been issued by MIT, Tufts, USC, Penn, Ohio State and some other very large institutions. Our transaction was complicated because of our small size, and because Bowdoin has a single rating from Moody’s (AA2) and no other rating agency. Most importantly, the size of the transaction proved to be a challenge because most institutions are not interested in buying “century bonds” unless the size of the offering is at least $250 million. Notwithstanding all these impediments, we were able to conclude the transaction successfully and at a very favorable rate (timing is everything!).

So, in 2019, we will have $128.5 million of bonds on our balance sheet (in addition to about $40 million of other debt), which is about $30 million more debt than we had before this transaction. We are going to use the extra $30 million over the next five years to complete a number of small capital projects on campus and to upgrade our technology. Among the specific projects we will fund are the renovation of the former Longfellow Elementary School for a Bowdoin studio arts and dance center; construction of a new small office “barn” behind the Stowe House and some improvements to the Stowe House itself to compensate, in part, for the loss of administrative space when we turn the McLellan building over to the Town of Brunswick in 2014; a storage facility on the former Brunswick Naval Air Station land; some landscaping on campus; and upgrades to our network and some co-location costs for our technology hardware.

This transaction is important to the College for a number of reasons, but from my perspective, most important is that Bowdoin now has permanent capital in place that will allow us to repay the tax-exempt debt that comes due in 2039. We have refinanced that tax-exempt debt with permanent capital and avoided the reality of having to invade the endowment to pay off the debt in 2039. Although 2039 seems like a long way off, it would have been a drag on the College well sooner, as any transaction we proposed after roughly 2025 would have had to account for the repayment of the tax-exempt debt.

Of course, none of us reading this today will be around in 2112 when our “century bond” comes due. But I am confident that our College will be, that it will be thriving, and that it will look back on this move as one that ensured prosperity and financial security well into Bowdoin’s third century.

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In the coming weeks, I will continue to offer my thoughts on subjects interesting to me or of importance to the College, but I want to hear your ideas too. If there is a subject you’d like me to address, send me an e-mail at mills@bowdoin.edu

Sounds like a good deal. Historically, tuition, room, and board has gone up at more than the rate of inflation. But if we assume that it will go up only at the rate of inflation, and that inflation should average about 3% over the next 100 years, tuition, room, and board should be somewhere near 1 million dollars per year.

Bowdoin is very lucky to have Barry Mills as its president. I am very proud that I am the father of one alumnus and the father-in-law of another. They fell in love at Bowdoin. I’m praying their children will go to Bowdoin.

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